Trump's blindspot on the widening trade deficit
The U.S. trade deficit widened to $502.25 billion in 2016, the largest since 2012.
Data: Bureau of Economic Analysis
Trump's blindspot: The president sees trade deficits as evidence of the United States losing, and appears to want to reduce this number whatever the consequences. But there are several reasons why this world view will not serve him well:
- U.S. GDP is nearly $19 trillion, so the trade deficit is just 2.6% of GDP. Even if we were able to close the trade gap purely through increasing exports, the effect of this relative to the overall economy would be small.
- That is an unrealistic scenario. Americans tend to buy more imports as the economy improves, as has been the case for the past several years.
- Trump could resort to tariffs to lower imports and potentially spur more domestic production, or put pressure on the Federal Reserve to adopt policies that devalue the dollar. But there would be potentially insurmountable institutional resistance.
- A border-adjusted tax may help reduce the deficit, but not if the dollar surges in value in response. A stronger dollar makes imports cheaper and exports tougher to sell abroad.